Insider trading is governed/prohibited by the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“Regulations”). Two concepts central to understanding insider trading are who is an insider and what is unpublished price sensitive information.
Regulation 2(g) defines an ‘insider’ as any person who is in possession of or has access to unpublished price sensitive information or a connected person. ‘Connected person’ is separately defined under Regulation 2(d). This definition is in two parts. It means any person associated with the company in any capacity in the immediately preceding six months (prior to the act) that enables such person to have access to unpublished price sensitive information and includes certain categories of persons who would be deemed to be connected persons such as a holding or subsidiary company, immediate relatives of directors or employees of a company, etc. The definition of ‘connected person’ includes professionals such as lawyers, chartered accountants, etc. engaged by a company in its ordinary course of business who maybe given or have access to unpublished price sensitive information for legitimate purposes or as maybe required by law. It is pertinent to note that this sharing of unpublished price sensitive information by a company with a professional engaged by it is not prohibited and in fact, specifically permitted. However, the professional then becoming an insider for the purpose of the Regulations, is prohibited from communicating such information or directly/indirectly trading on the basis of such information.
Regulation 2(n) defines ‘unpublished price sensitive information’. This definition has two key components; ‘unpublished’ and ‘price sensitive’. ‘Unpublished’ refers to information that is not generally available in the public domain and ‘price sensitive’ refers to the ability of such information to materially affect the price of securities of a company, if made available. Therefore, both criteria must be satisfied. All unpublished information may not necessarily be price sensitive.
The next question that arises for consideration is what exactly do the Regulations prohibit? The answer lies in Regulations 3 and 4. Communicating or providing access to unpublished price sensitive information relating to a company or its securities that are listed or proposed to be listed, by an insider to any other person (including another insider), that is not in furtherance of a legitimate purpose or in discharge of obligations of such insider, is prohibited. Regulation 3 not only casts an obligation on the insider in possession of unpublished price sensitive information from disclosing such information but also on other persons from procuring such information from an insider that is not for a legitimate purpose of in furtherance of such person’s duties and obligations. Regulation 4 prohibits the trading in securities by an insider while in possession of unpublished price sensitive information. If such trading is undertaken, the onus would lie on the insider to prove that such trading does not qualify as insider trading and falls within the exemptions/exceptions set out in the proviso to Regulation 4(1).
To prevent insider trading, the board of directors of listed companies are mandatorily required to put in place a Code of Fair Disclosure and Conduct, internal controls and adequate restrictions and periodically evaluate the effectiveness of the same. Listed companies are also required to put in place written policies and procedures for enquiry into cases of leak of unpublished price sensitive information or suspected leak thereof and a whistleblower policy. Further, initial disclosures and continual disclosures are required to be given by directors, key managerial persons, connected persons, etc. of their shareholding and transactions therein from time to time.
At the heart of prohibiting insider trading and requiring insiders to make disclosures of their shareholding and trading is investor protection, promoting transparency in trading on the stock exchange and equality of access to information. While insider trading does not strictly fall within the scope of anti-competitive agreements under the Competition Act, 2002, it would be interesting to examine insider trading from an anti-trust perspective.